How inflation impacts your insurance cover

Underinsurance is a significant problem in South Africa. Insurance valuation expert, Quantam, last year estimated that almost 80% of South Africans were underinsured by more than 50% of the total value of their insured possessions. That means that the majority of people who have short-term insurance policies are unable to use them to the fullest extent as a result of their coverage falling short.

One of the main reasons for this shortfall is the impact inflation has on the cost of replacing stolen or damaged items.

Inflation is the rate (how quickly or how slowly) the prices of goods and services rise over a period of time. People often think that inflation is simply an increase in prices.  A more accurate description is actually a decrease in the value of money so much so, that it requires more money to purchase the same thing years later.

Inflation drives up the cost of building materials, vehicle parts, labour, components, raw materials and specialised technology, even as the items themselves, like cars for instance, depreciate in value.

This increasing replacement cost means that the policy limits you set years ago become inaccurate over time, leading to you only being partially covered or underinsured.

Insurance is built on the premise that insurance companies will take in sufficient funds through monthly premiums, and spread risks across enough policyholders that paying out claims doesn't actually cost them anything. When policyholders are not adequately insured, it creates a deficit that the insurer is not in a position to cover.

For example, if you bought an item in 2020 that cost R1000 and today it costs R1500, but you still have it insured for the R1000 you originally paid for it, you will have a R500 shortfall on that item.

When this happens across an entire household of items, including big ticket items like furniture upwards of R10 000, or with larger assets like vehicles or housing structures, you can see how quickly the gap between being insured and being uninsured widens.

The result? You are left to cover the balance of the replacement costs yourself, which in certain instances is impossible. The only solution then is to replace the item with a lesser version or not at all.

This highlights the importance of annual insurance policy reviews. Such a review should be undertaken with your broker, and fixed assets insured at their replacement value, vehicles at their retail value and movable equipment at market value.

If you change your home contents by purchasing new appliances, equipment or specialised items, add any extras to your vehicle, or renovate your home in any way, let your broker know.

These amendments all have an impact on your insurance cover and therefore your premiums. Paying for the correct amount of cover now, accurately matched to your assets, means having peace of mind when it comes time to claim.